How Unjust! An Experimental Investigation of Supervisors' Evaluation Errors and Agents' Incentives

33 Pages Posted: 8 Jan 2012  

Lucia Marchegiani

University of Rome III; Libera Università degli Studi Sociali (LUISS) Guido Carli

Tommaso Reggiani

LUMSA University

Matteo Rizzolli

LUMSA University

Abstract

In our simple model the supervisor: i) cannot observe the agent's effort; ii) aims at inducing the agent to exert high effort; but iii) can only offer rewards based on performance. Since performance is only stochastically related to effort, evaluation errors may occur. In particular, deserving agents that have exerted high effort may not be rewarded (Type I errors) and undeserving agents that have exerted low effort may be rewarded (Type II errors). We show that, although the model predicts both errors to be equally detrimental to performance, this prediction fails with a lab experiment. In fact, failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. We discuss our result in the light of some economic and managerial theories of behavior. Our result may have interesting implications for strategic human resource management and personnel economics and may also contribute to the debate about incentives and organizational performance.

Keywords: agency theory, organizational justice, compensation, type I and type II errors, real effort

JEL Classification: C91, M50, J50

Suggested Citation

Marchegiani, Lucia and Reggiani, Tommaso and Rizzolli, Matteo, How Unjust! An Experimental Investigation of Supervisors' Evaluation Errors and Agents' Incentives. IZA Discussion Paper No. 6254. Available at SSRN: https://ssrn.com/abstract=1981210

Lucia Marchegiani (Contact Author)

University of Rome III ( email )

Via Silvio D'amico, 77
Rome, Rome 00145
Italy

Libera Università degli Studi Sociali (LUISS) Guido Carli ( email )

Viale Pola, 12
Rome, 00198
Italy
(+39)0685225326 (Phone)
(+39)0685225356 (Fax)

HOME PAGE: http://www.mba.luiss.it

Tommaso Reggiani

LUMSA University ( email )

Via della Traspontina
Roma, Rome 00192
Italy

HOME PAGE: http://https://sites.google.com/site/tommasoreggiani/

Matteo Rizzolli

LUMSA University ( email )

Via Pompeo Magno
Roma, Rome 00191
Italy

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